The good news about Brazil's problems.

Lula's Silver Lining

The good news about Brazil's problems.

As Brazil approaches its October elections, political scandal dominates the headlines, crime still plagues the largest cities, the gap between rich and poor persists, and the business community grudgingly accepts that President Luiz Inácio Lula da Silva will win an easy re-election. But there is one very important cause for optimism in Brazil: Its current problems are the sort that plague mature free-market democracies, not emerging-market basket cases.

Four years ago, when Lula became Brazil's first "leftist" president since democracy was restored in 1985, many feared he would prove a populist firebrand—and that at the first sign of social unrest, he would renege on campaign promises to pursue a disciplined economic policy. Some worried that he might even follow the lead of Venezuelan President Hugo Chávez and throw Brazil's economic liberalization into reverse. But in Latin America, leftist is not a particularly revealing label. Leftist Chávez is an ideologue, a would-be Castro, a true believer. Leftist Lula made his name as a tough-minded labor negotiator; he is a pragmatist, a man who cuts deals. This difference is clearly reflected in the choices they've made as heads of state.

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Lula has kept his promises and balanced the need to raise rural living standards with the demands of responsible economic policy. During his presidency, the state has made debt repayments on schedule. The economy has generated more than 4.5 million new jobs. Trade surpluses top $40 billion per year. The lowest inflation rates in decades and an expansion of consumer credit have increased the purchasing power of millions.

The rural poor receive small but badly needed monthly payments from the state in exchange for keeping their children in school and ensuring that they are properly vaccinated. Lula's critics argue that the program does not encourage the entrepreneurialism the countryside desperately needs. That may be so, but it certainly helps large numbers of Brazilians educate their children and feed their families.

The business community doesn't like Lula any more now than it did four years ago. But they fear him less, and that's important. Most of their disappointment with his presidency grows from the corruption scandals that continue to stain his Worker's Party (known by its Portuguese initials, PT) and from missed opportunities for stronger growth. But opposition parties have plenty of corruption charges to answer as well. And fears that Lula's government would steer the country away from the liberal reforms that have made the country an attractive investment destination have largely vanished.

Observers are too pessimistic about Lula's ability and willingness to accelerate much-needed reforms. The conventional wisdom is that while Lula will easily win re-election, the PT will suffer significant losses, diminishing the president's leverage with the National Congress. But the party is likely to fare much better than many expect. Lula's popularity might well extend the PT's appeal into parts of the country still considered strongholds of other parties. His newly enhanced political capital should allow him to push for judicial reform and a host of other measures right after the elections. Because the PT's better-than-expected performance will be credited to Lula's broad appeal, the outcome will help him strengthen his grip on the party agenda and move forward on reforms that some within the PT would prefer to shelve. Finally, Lula's former Finance Minister Antonio Palocci, a determined market reformer, is likely to win a seat in Brazil's legislature. He has maintained ties with both Lula and a number of key reformers in the PT and other more centrist parties. As a federal deputy, Palocci is likely to play a substantial role, and his influence will help unify support for reform.

There are big challenges ahead for Brazil, and many of them cannot be tackled in the near term. There's an outside chance that official discussion will begin after the elections on much-needed pension-reform legislation. Sharp cuts in government spending and major privatizations will not be on the agenda. High taxes and overregulation continue to burden Brazil's business climate. Though living standards have improved for millions since Lula assumed office, expectations have grown that the government can and should do more.

Still, Brazil has come a long way in the last four years. No serious observer believes that the country's stability is threatened as voters head to the polls on Sunday. The government decisions that now determine how fast Brazil's economy grows and whether investors in the country will make or lose money have more to do with the technical aspects of key economic reforms, inflation and growth forecasts, and fiscal policy than with political conflicts that could generate debt default and capital flight.

You can tell a lot about a country by its problems. Brazil's current challenges suggest that the country has become quite a stable place.